Changes in the crypto market after the Shapella update

In September 2022, the Ethereum network experienced its most critical moment yet: the Merge, which transitioned the network from PoW to PoS. Further, the adoption of the EIP1559 mechanism made ETH deflationary.

According to ultrassom.money, total ETH supply has declined by about 0.068% since the merger on April 10. Now, as the first major Ethereum upgrade after Merge, what kind of changes will the Shapella upgrade bring to the industry?

Source: ultrasound.money
Source: ultrasound.money

Growing confidence among ETH holders

The Shapella update mainly addresses four major EIPs including EIP-3651, EIP-3855 and EIP-3860 all related to reducing gas consumption.

Further, EIP-3860 also includes increasing the maximum size of smart contractsand the most anticipated EIP-4895 activates stakeout function on Beacon Chain.

The Shapella update is clearly great news for developers, users and stakeholders alike:

  • Increasing the size limit of smart contracts allows developers to create more creative Ethereum applications;
  • Lower gas consumption reduces operating costs and barriers to entry for users;
  • The withdrawal feature allows investors to withdraw their ETH stake and collect the rewards.
ETH art
ETH art

Some fear that ETH will face a sell-off after the withdrawal is triggered. However, liquidity tokens (LSTs) now account for 48% of total ETH staking, and that portion of locked liquidity has now been released.

At the same time, early investors who locked their ETH before the Shapella upgrade are optimistic about the long-term development of ETH and are unlikely to sell their positions at the current price level.

Further, once the withdrawal feature is activated, a limit will be set on the amount of ETH that can be withdrawn from the Beacon Chain per daymeaning it is unlikely that a mass sale will occur.

Let’s analyze the price trend. Since the developers confirmed the activation of the Shapella update in January 2023, the price of ETH has increased by more than 40%, as of April 10, according to >CoinEx.

There is no doubt that the upgrade has once again improved investor confidence in Ethereum.

ETH price
ETH price

Opportunity for evicting service providers

The following withdrawal feature is positive for staking service providers.

Prior to the Shapella update, investors could not strike ETH, which is a huge risk that prevented some cautious institutions, whales, and risk-averse investors from joining ETH staking. This is also why Ethereum’s participation rate is only 15.07%, lower than many other PoS coins.

stake ETH
stake ETH. Dune font

The Shapella update provides users with clear output. Meanwhile, investors no longer have to worry about LSTs (Liquid Staking Tokens) falling in value in extreme scenarios or the risk of not being able to withdraw ETH in the long run.

Therefore, more long-term investors can invest in ETH to earn stable annual returns (APY is currently over 4%).

Top Ethereum staking service providers include liquid staking protocols, centralized exchanges and traditional mining pools, with market shares of 33.3%, 27.3% and 17% respectively, according to platform Dune.

After the Shapella update, these platforms are likely to embrace new growth opportunities.

Breakdown by ETH Stake Source: Dune
Breakdown by ETH Stake Source: Dune

LSD: A new space for the imagination

In addition to more opportunities for staking service providers, LSTs issued by liquid staking protocols are expected to become more stable.

In June 2022, platforms such as Celsius and Alameda sold large amounts of stETH to close funding gaps, depleting the liquidity of stETH/ETH. This led to a decoupling of stETH, with a maximum discount rate of 6.5%, i.e. one stETH traded for just 0.935 ETH.

SETH always high
SETH always high

Source: Dune

stETH is the largest LST in terms of TVL, accounting for more than 70% of the market share. In addition, stETH offers superior liquidity, but can still be disconnected in extreme cases.

However, the Shapella update minimizes the risk of disconnecting LSTs thanks to the recording activation. According to the statistics, the value of stETH gradually recovered as the Shapella update approached.

Source: DeFiLlama
Source: DeFiLlama

The steady value of LSTs like STETH, along with the rising TVL of the LSD (Liquid Staking Derivatives) category, will create more growth opportunities for derivatives.

Moreover, it will also lead to the emergence of more DeFi products, increasing the returns and capital efficiency of LSTs. At this point, more innovative liquidity deployment mechanisms and their derivatives may emerge.

As the focus of the crypto space, the Shapella update is sure to have an impact on the market landscape, especially for Ethereum and related ecosystems. In addition, the Ethereum-powered LSD category may also affect other public PoS networks.

ETH staking is also expected to become a new option for long-term investors looking for stable returns. Also, after the Shapella update, next Ethereum update Cancun will continue to implement the scale plan and laying the groundwork for Tier 2 development.

Ethereum is one step closer to its goal of becoming the “world computer”. The success of the Shapella upgrade will be a positive sign for both Ethereum and the crypto industry, benefiting investors, developers and users alike.

Source: Live Coins

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